Comparison of Chapter 7 and Chapter 13 Bankruptcy

Article Written By: jimknight

Congress made sweeping changes to the bankruptcy laws that gave consumers more incentive to seek bankruptcy relief under a different Chapter rather than Chapter 7. This was called Chapter 13. This particular Chapter allows people with a steady income to keep property, like a car or a mortgaged house, that they might otherwise lose.

All in all, there are four bankruptcy chapters in United States law: Chapter 7, 11, 12, and 13. Chapters 7, 11, and 13 are by far the most common, the 7 being the most. These laws have many similarities and differences. Here are a few of them.

In case of Chapter 13, the court can approve a payment plan that can run up to five years. This process lets you pay off today's debts with future earnings. Although, you have to have a steady source of income to qualify for this filing.

On the other hand, Chapter 7 is known as "straight bankruptcy." About two thirds of all bankruptcies fall under Chapter 7. In this case assets are sold and the proceeds are given to creditors for debt repayment. Chapter 7 can be filed every eight years, although it is bound to stay on your credit report for ten years. It looks bad to lenders, and it makes getting credit almost impossible in the couple years following the filing. This can be voluntary or involuntary, often being initiated by creditors.

Chapter 13 bankruptcies are quiet different because they do not eliminate debt. Instead, they restructure it. Firstly, a payment plan is set up, which usually takes three years but can last as long as five and any remaining debt after the plan terminates is eliminated. Chapter 13 is looked upon more kindly than a Chapter 7 due to the existence of the partial payment system.

It is technically supposed to stay on the debtor s record for ten years, but in real practice it stays on for seven. This particular feature encourages people to file for it, because it allows the creditors to receive something rather than almost nothing.

Chapter 13 bankruptcies can be filed in every two years unless a Chapter 7 was filed previously. In cases like these the applicant must wait four years from the time of filing the Chapter 7. Most of the debt gets eliminated through Chapter 7, and a payment plan is set up for the remaining with Chapter 13.

Although they share many similarities, there are important differences. None of them look good, but Chapter 13 looks better than Chapter 7. All of them adversely affect one's ability to get credit, especially during the first couple years following the bankruptcy filing.

However, the great thing about the US is that one can always get a second chance. Bankruptcies are not the end of the world, and one can recover from them with effort.

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